Ethica Institute of Islamic Finance™

What is the correct mode of executing a Murabaha contract for purchase of foreign goods?

A Murabaha contract for purchase of foreign goods would include the following parties:

• The Islamic Bank (“Bank”)
• Bank’s client (“Buyer”)
• Foreign exporter (“Exporter”)

The Murabaha transaction would include the following steps:

1)The buyer requests a Bank to purchase goods from a foreign exporter

2) The bank opens a documentary credit under its own name.

3) The exporter ships the goods to the bank and simultaneously dispatches shipping documents to the bank.

4) The bank, upon receipt of shipping documents, sends them to the buyer against an interim promissory note.

5) The buyer inspects the goods on arrival, and communicates his satisfaction to the bank.

6) The bank pays the exporter.

7) The bank and the buyer execute a sale contract. The buyer signs a promissory note which states the buyer’s promise to pay the bank the cost of the goods plus a specified markup. In case of payment in installments, multiple promissory notes may be drawn.

8) The buyer pays the bank on the due date of promissory note.

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